Separating Business and Personal Finances in Hong Kong

At a glance

The statutory restrictions, exemption thresholds and disclosure requirements are as set out in the Companies Ordinance and the Inland Revenue Ordinance and most recently published by the relevant authorities.

”The company is mine” — that is not how the law counts it

The great advantage of a limited company is limited liability: the company’s debts generally do not follow you.

And the precondition for that protection is that the company and you are genuinely separate.

Keeping the two sets of money mixed for years is not only a bookkeeping nuisance; there is a more fundamental risk. If a dispute or a liquidation ever arises, “the company and the director were never actually separate” becomes the opening for attacking limited liability.

There is more on this in how far a director’s personal liability reaches.

What is a director’s current account?

Simply an account recording who owes whom between you and the company.

You owe the company — you spent company money on personal costs, or took funds out that were neither salary nor dividend.

The company owes you — you paid rent, purchases or other costs out of your own pocket on the company’s behalf.

The account is not unlawful in itself; plenty of companies have one. The problems are three:

One: the balance keeps growing. A little each year, and five years later it is a six-figure sum.

Two: the character is unclear. When the auditor or the IRD asks, you have to explain every item. Without records, you cannot.

Three: statutory restrictions. See the next section.

There are statutory limits on a company lending to a director

This is one that many owners have no idea about.

Part 11 of the Companies Ordinance (Fair Dealing by Directors) provides that a company must not make a loan to a director of the company, or to a director of its holding company, without the specified approval of the members.

There are exceptions, the most commonly used being the small-amount exemption in section 505 — transactions not exceeding 5% of the company’s net assets or called-up share capital may be exempt.

What that means in practice: if your company’s net assets are only a few hundred thousand, 5% is a few tens of thousands. Spend past that and it is technically a transaction requiring members’ approval.

Most SMEs are not deliberately in breach — they simply do not know the line exists. And the auditor will always look at that balance when preparing the accounts. Explaining it then is more trouble than dealing with it beforehand.

”Taking money out of the company” has three routes, taxed completely differently

This is the core of the whole thing. The same sum of money, characterised differently, produces very different tax results:

As salary — deductible by the company; you pay salaries tax, IR56B has to be filed, and MPF contributed.

As a dividend — not deductible by the company, but you pay nothing on receipt (Hong Kong has no dividend tax). This requires distributable profits and a proper resolution.

As a loan — not deductible by the company, and no immediate tax for you, but it has to be repaid, and it is subject to the statutory restrictions above.

On choosing between them, see salary or dividends for the owner.

The worst approach is not choosing — simply taking the money, with it sitting in the current account year after year: no deduction, no proper resolution, and a debt building up that has to be repaid.

Already mixed — how do you untangle it?

The reality is that most small companies have mixed the two at some point. The steps:

Step one: stop mixing. From today, company costs go on the company account or card, personal costs on your own. This step costs nothing and is the most effective.

Step two: classify the past transactions item by item. Go through the bank statements and mark each entry as company or personal. It is tedious, but it only has to be done once.

Step three: decide how to deal with the historical balance. Typically there are a few approaches: actually repaying it, regularising it as qualifying salary or dividends, or partially offsetting it. Which applies depends on the company’s actual circumstances and the state of the accounts — this step is worth going through with someone rather than posting a journal entry off the cuff.

Step four: set up how you will take money out in future. A fixed monthly salary, with dividends reviewed annually. With a fixed arrangement, “I don’t remember how much I took” stops happening.

The cheapest way to keep them apart

Nothing elaborate is needed — three things will do:

• One company bank account and one company card, used only for company costs (on the account-opening requirements, see opening a Hong Kong company bank account)
• One personal account and one personal card, used only for personal costs
• When you occasionally have to pay something yourself, note it immediately — the date, the amount, what it was for; one line is enough

You will sometimes use the wrong card — that happens. Note it the same day and adjust it at month end. The hard part is not the rule; it is not leaving it until the year end.

Solve this and a lot of other problems disappear by themselves

Once the two are separate you will find bookkeeping faster, audit queries fewer, deductible expenses standing up properly, and the director’s current account no longer a black box needing explanation.

The same material also makes handing things to your accountant far smoother.

Want someone to untangle the historical current account and set up how you take money out from here? Talk to us.

This is general information and does not constitute legal, accounting or tax advice. The restrictions on loans to directors, the exemption thresholds and the disclosure requirements are as set out in the Companies Ordinance and the Inland Revenue Ordinance and most recently published by the relevant authorities; where a substantial historical balance is involved, consult a professional.